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Income Tax Appellate Tribunal, “A” BENCH, KOLKATA
Before: Shri P.M.Jagtap & Shri S.S. Viswanethra Ravi
SHRI S.S. VISWANETHRA RAVI, JM This appeal of the assessee arises out of the order of the CIT(A)-Central-XXXVI, Kolkata in Appeal No. 401/CIT(A)-XXXVI/Kol/Wd-3,MSD//10-11/217 dated 18-04- 2013 for the assessment year 2005-06
The assesse submitted that the ground no’s 1 and 2 are not pressed and accordingly both ground no’s 1 and 2 are dismissed.
The only ground in this appeal is as to whether CIT-A justified in confirming the order of AO in disallowing the amounts of Rs.13,79,179/- U/Sec 40(a)(ia) of the Act in the circumstances of the case.
The appellant assessee raised the following effective ground: That the learned assessing officer has erred both in law as well as on the facts of the case in disallowing an amount of Rs.13,79,179/-under section 40(a)(ia) on account of commission although defacto the amount paid was not in the nature of commission.
Brief facts of the case are that the assessee is in Firm and in the business of trading and servicing of motorcycle and filed his return of income on 27-10-2005.
The assessee is a dealer for sale of TVS brand motorcycle for sale in the district of Murshidabad and some areas of Bhirbhum and Nadia Districts of West Bengal. The assessee sells motorcycles in the following manner:
A) Cash sales to sub dealers B) Credit sale to sub dealers C) Direct sales to customers from the showroom of the assessee D) sales to customers to mechanics
In all the cases mentioned above, the assessee offers discount at a fixed rate depending upon the model. Whereas in the case of (A) (C) and (D) above i.e cash sales, the amount of sales net of discount is received in cash, in the cases of credit sales at (B) above, that sub dealers remit the sale proceeds after deducting the discount. The fact that invoices are raised and payments are received net of discount are invariably mentioned in each and every invoice, copies of 13 number of invoices are enclosed at pages 13 to 25 of the paper book as illustration. As regards sales at clause (D) above, petty discounts at Rs.400/500 are paid to each mechanic for bringing the customers – the discount aggregated to Rs.1,89,900/-during the year. M/s. Berhampore Motor Cycle
The assessing officer and CIT-A has that they amounts retained by the persons referred to above was in the nature of commission and the assessee ought to have deducted tax at source under section 194H of the act. Since the assessee failed to deduct tax at source, the assessing officer invoked the Provision of section 40 (a)(ia) and disallowed a sum of Rs.13,79,174/-and added the same to the total income of the assessee. The CIT-A confirmed the order of the assessing officer giving raise ground no –3 by the assessee before the Tribunal.
Before us, the learned AR submits that the assessing officer made a reference to separate treatment of cash discount of Rs.4,98,645/-in the trading account relating to the discount paid in respect of direct sales to customers mentioned at (C) above. In other cases i.e. in respect of sales at clause (A) (B) and (D) above amounting toRs.13,90,070/- the expenditure has been debited in the profit and loss account under the head ‘ commission’ which according to the assessing officer was a mistake. According to assessing officer the nature of relationship between the assessee and the sub dealers is clearly that of principal to principal. The assessee relied on Ahmedabad Stamp Vendors Association vs Union Of India, reported in (2002) 257 ITR 202(Guj) where the relationship is between principal to principal, the question of payment of commission in any form by the assessee does not and cannot arise as to invoke the provision of section 194H of the act.
The learned AR submits for the purpose of section 194H the term commission or brokerage includes any payment is received or receivable, directly or indirectly, by a person acting on behalf of another person for services rendered i.e. not being professional services or for any services in the course of laying or selling of goods or M/s. Berhampore Motor Cycle in relation to any transaction relating to any asset, valuable article or thing not being securities. Further according to learned AR in a usual business transaction, commission is paid by principal to agent after services are rendered and in the case of the assessee the transactions are in the nature of principal to principal and no element of agency is to be found and no services are to be rendered. The learned AR prayed this Tribunal to allow the appeal by deleting the addition of Rs.13,90,070/- made by the assessing officer. The learned DR relied on the order of CIT-A.
We have considered the rival submissions and perused the paper book and we find the following is the breakup of amounts paid to sub dealers and mechanics: BERHAMPORE MOTORCYCLE PANCHANANTALA, P.O COSSIMBAZAR DIST-MURSHIDABAD DISCOUNT PAID FOR THE YEAR 2004-2005 SUB-DEALER (MOTORCYCLE) MONTH AMOUNT APRIL 113,895.00 MAY 117,665.00 JUNE 109,165.00 JULY 98,100.00 AUGUST 74,485.00 SEPTEMBER 91,995.00 OCTOBER 97,910.00 NOVEMBER 88,685.00 DECEMBER 100,890.00 JANUARY 116,230.00 FEBRUARY 101,985.00 MARCH 89,165.00 1,200,170.00
MECHANIC COMMISSION MONTH AMOUNT APRIL 17,150.00 MAY 16,050.00 JUNE 14,550.00 JULY 16,100.00 AUGUST 14,950.00 SEPTEMBER 14,050.00 OCTOBER 17,200.00 NOVEMBER 15,200.00 DECEMBER 15,500.00 JANUARY 15,700.00 FEBRUARY 16,500.00 MARCH 16,950.00 189,900.00 1,390,070.00
12. The above breakup of commission paid to the mechanics of each month i.e. April 2004 to March 2005 is given it page 27 to 38 of the paper book. A perusal of the same shows that each of the payment made to different persons does not exceed the aggregate the sum of Rs. 2500/-. Therefore the provisions of section 194H is not applicable for these payments. The addition of Rs.1,89,900/- being commission paid to mechanics is therefore deleted.
13. As far as the payments made to sub dealers concerned we are of the view that the sum in question is in the nature of commission. There is no written agreement between the assessee and sub dealers which is brought on record by the assessee. Therefore it cannot be said that as between the assessee and the sub dealer the relationship is that of principal to principal. Therefore the conclusion drawn by the assessing officer is correct. In this regard assessing officer as observed as follows:
“A party-wise ledger of the alleged payments of Rs.13.79,179/- was filed and details of payment to the mechanics of payment of Rs. 10,850/- was also filed . Now, the assessee in support of his statement that the alleged payments were in the nature of discount giving to the sub-dealers for sale of TVS brand motorcycle. The assessee submitted copies of invoice cum cash memo. All those copies of bills appears to be self- made. It is noted that, on a particular date only a single motorcycle was sold, which is very difficult to conceive in respect of transaction of a dealer and sub-dealer of goods. The transaction with a sub-dealer as far as sale to them is concerned is similar to sale of to an individual purchaser. In the trading account (motorcycle account) the d already allowed a cash discount of Rs. 4,98,645/- on sales. Had the amount of Rs.13,90,070/- been discount given at the time of sale to its sub-dealer, it could have been or under the head cash discount in the trading account. The assessee aware of the of claim of expenditure namely- discount and commission. He was aware of the nature of payment to individual customers and payment to its sub-dealer, when sales had be it an individual or sub-dealer as claimed. So the auditor rightly claimed the expenditure of Rs. 13,90,070/- under the head commission as is done year to year. In fact, auditor in his audit report annexure part A and B in serial no.11 clearly put the amount under the commission paid. So, the assessee on his own as it suited him, stated that mistaken the claimed under the commission. It is pertinent to note here that the sub-dealer also paid incentives free service as per company norms etc. and for which details were filed. So the sub-dealer was paid both commission and debit notes. Judging the totality of the facts and circumstances of the case and viewing it through the normal practice of business transaction of a dealer and a sub-dealer, I have of the firm at the sub-dealer were paid commission on sale for their services rendered to their principals M/s Berhampore motorcycles. It is a fact that no tax was deducted at source on the commission so paid to the sub-dealer U/S 194H of the IT Act. As such, provision of section 40(a)(ia) is clearly applicable in this case of the assesseee.”
14. We therefore confirm the order of CIT-A in so far as it relates to sum of Rs.12,00,170/- paid to sub dealers.
We are however of the view that in respect of payment to sub dealers the assessee should get the benefit of showing before the assessing officer that the payees have filed their returns of income and included amounts received from assessee in their returns of income. In this regard, we may refer to the Hon’ble High Court of Delhi supra, while dealing with the case on hand, had an occasion to read down the decision of Agra Bench of Tribunal in ITA 337/Agra/2013 as it was relied on, and held and agreed with the reasoning and conclusion to the insertion of second proviso to section 40(a)(ia) of the Act by the legislature. The relevant portion from paras 11 to 14 are reproduced here in below:
11. The first proviso to Section 210 (1) of the Act has been inserted to benefit the Assessee. It also states that where a person fails to deduct tax at source on the sum paid to a resident or on the sum credited to the account of a resident such person shall not be deemed to be an assessee in default in respect of such tax if such resident has furnished his return of income under Section 139 of the Act. No doubt, there is a mandatory requirement under Section 201 to deduct tax at source under certain contingencies, but the intention of the legislature is not to treat the Assessee as a person in default subject to the fulfillment of the conditions as stipulated in the first proviso to Section 201(1). The insertion of the second proviso to Section 40(a) (ia) also requires to be viewed in the same manner. This again is a proviso intended to benefit the Assessee. The effect of the legal fiction created thereby is to treat the Assessee as a person not in default of deducting tax at source under certain contingencies.
Relevant to the case in hand, what is common to both the provisos to Section 40 (a) (ia) and Section 210 (1) of the Act is that the as long as the payee/resident (which in this case is ALIP) has filed its return of income disclosing the payment M/s. Berhampore Motor Cycle
received by and in which the income earned by it is embedded and has also paid tax on such income, the Assessee would not be treated as a person in default. As far as the present case is concerned, it is not disputed by the Revenue that the payee has filed returns and offered the sum received to tax.
Turning to the decision of the Agra Bench of ITA T in Rajiv Kumar Agarwal v. A CIT (supra ) , the Court finds that it has undertaken a thorough analysis of the second proviso to Section 40 (a)(ia) of the Act and also sought to explain the rationale behind its insertion. In particular, the Court would like to refer to para 9 of the said order which reads as under:
"On a conceptual note, primary justification for such a disallowance is that such a denial of deduction is to compensate for the loss of revenue by corresponding income not being taken into account in computation of taxable income in the hands of the recipients of the payments. Such a policy motivated deduction restrictions should, therefore, not come into play when an assessee is able to establish that there is no actual loss of revenue. This disallowance does deincentivize not deducting tax at source, when such tax deductions are due, but, so far as the legal framework is concerned, this provision is not for the purpose of penalizing for the tax deduction at source lapses. There are separate penal provisions to that effect. Deincentivizing a lapse and punishing a lapse are two different things and have distinctly different, and sometimes mutually exclusive, connotations. When we appreciate the object of scheme of section 40(a)(ia), as on the statute, and to examine whether or not, on a "fair, just and equitable" interpretation of law- as is the guidance from Hon'ble Delhi High Court on interpretation of this legal provision, in our humble understanding, it could not be an "intended consequence" to disallow the expenditure, due to non deduction of tax at source, even in .a situation in which corresponding income is brought to tax in the hands of the recipient. The scheme of Section 40(a)(ia), as we see it, is aimed at ensuring that an expenditure should not be allowed as deduction in the hands of an assessee in a situation in which income embedded in such expenditure has remained untaxed due to tax withholding lapses by the assessee. It is not, in our considered view, a penalty for tax withholding lapse but it is a sort of compensatory deduction restriction for an income going untaxed due to tax withholding lapse. The penalty for tax withholding lapse per se is separately provided for in Section 271 C, and, section 40(a)(ia) does not add to the same. The provisions of Section 40 a)(ia1 as they' existed prior to insertion of second proviso thereto, went much beyond the obvious intentions of the lawmakers and created undue hardships even in cases in which the assessee's tax withholding lapses did not result in any loss to the exchequer. Now that the legislature has been compassionate enough to cure these shortcomings of provision, and thus M/s. Berhampore Motor Cycle obviate the unintended hardships, such an amendment in law, in view of the well settled legal position to the effect that a curative amendment to avoid unintended consequences is to be treated in nature even though it may not state so specifically, the insertion of second proviso must be given retrospective effect from the point of time when the related legal provision was introduced. In view of these discussions, as also for the detailed reasons set out earlier, we cannot subscribe to the view that it could have been an "intended consequence" to punish the assessees for non deduction of tax at source by declining the deduction in respect of related payments, even when the corresponding income is duly brought to tax. That will be going much beyond the obvious intention of the section. Accordingly, we hold that the insertion of second proviso to Section 40(a)(ia) is declaratory and curative in nature and it has retrospective effect from 1st April, 2005, being the date from which sub clause (ia) of section 40(a) was inserted by the Finance (No. 2) Act, 2004."
The Court is of the view that the above reasoning of the Agra Bench of IT AT as regards the rationale behind the insertion of the second proviso to Section 40(a) (ia) of the Act and its conclusion that the said proviso is declaratory and curative and has retrospective effect from 1st April 2005, merits acceptance.
The Hon’ble High Court supra found that there is a mandatory requirement u/s. 201 to deduct at source, but, however, opined, the assessee cannot be viewed as a person in default in view of the first proviso to section 201(1) of the Act and further that the insertion of second proviso to section 40(a)(ia) of the Act was intended to benefit the assessee and it shall be viewed as in the same manner as that of first proviso to section 201(1) of the Act.
Keeping in view of the principle enunciated by the Hon’ble High Court of Delhi supra, we are of the view that the assessee cannot be treated as a defaulter in view of the first proviso to section 201(1) r/w second proviso to section 40(a)(ia) of the Act if the concerned payee has taken into account the relevant sum for computing income in his return of income furnished u/s. 139 and has paid tax due on the income declared in such return. We, therefore, set aside the impugned order of ld. CIT(A) confirming the M/s. Berhampore Motor Cycle disallowance made by the AO u/s. 40(a)(ia) and restore the matter to the file of the AO for deciding the same afresh in the light of first proviso to section 201(1) r/w second proviso to section 40(a)(ia) which are held to be applicable to the year under consideration being retrospective in effect.
In the result, the appeal of the assessee is partly allowed for statistical purpose.
Order Pronounced in the Open Court on 3rd August, 2016.